Legacy vs Innovation: The Difficulty Facing Futures Exchanges

Written By: Magnus Almqvist, Head of Sales at Exberry

January 29, 2024

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Magnus Almqvist, Head of Sales at Exberry, is speaking on a panel discussing “Cost Of Legacy Technology” at the Association of Futures Market’s 26th Annual Conference held in Bangkok, Thailand on 2nd February.

Amidst the backdrop of digitisation and cost concerns, a growing proportion of today’s futures markets are intent on improving their services – whether through updating their technology or developing new markets and products.

Exchanges are increasingly focused on modernising markets, providing enhanced price formation and increased transparency. We can see this with the recent announcements of Kenya’s new Komex commodities exchange and the development of specialised commodity trading platforms by the Vietnam Commodity Exchange (MXV).

In addition, exchanges are procuring the ability to quickly launch new types of futures contracts. For example, Abaxx has launched the world’s first futures contract for nickel sulphate (a type of nickel used in electric vehicle (EV) batteries).

These trends have translated into pressure for underlying technology. Exchanges are faced with an important decision: Should they intensify the development of parallel trading systems that are more agile and flexible, while leaving legacy systems in place?

Cost of legacy

If the choice is inertia when it comes to legacy technology, operators of exchanges face a number of risks. Primarily, there is risk associated with the inevitable upgrading of legacy tech, as there is no guarantee that these complex problems can be adequately solved. Experience has shown that whenever stock exchanges do need to implement something new, they have to be extremely careful that changes do not have unintended ramifications elsewhere in the system. Indeed, instances have been known in the past where alterations have resulted in extremely large consequences occurring very far from the original point of change.

Another related risk is the lengthy timeframes needed to implement any system improvements. Updating outdated technology architecture prevalent in the capital markets is crucial, yet the introduction of new features can become a cumbersome process. Customers of legacy infrastructures often complain about the slow prioritisation of upgrade requests, illustrating how traditional systems have become complex and resistant to change.

The alternative

Today, however, market infrastructure operators have an alternative; the availability of new technologies that embrace the adoption of modular, continuous SaaS delivery platforms. By adopting modern tech architecture, such as microservices and cloud-based solutions, the processes of development, testing and deployment can all be streamlined. This enables quicker responses to market demands and facilitates the integration of innovative functionalities. For instance, feature requests can be completed in a matter of weeks rather than years. Firms can take advantage by starting small, testing the market, innovating, pivoting, and eventually, scaling.

Further, these technologies can be deployed in parallel with existing legacy systems, allowing an innovative, low-risk, short time-to-market approach to exploring both new asset classes and products, as well as new technologies. Migration of markets can then be phased across as the new system is embedded into exchange operations and with market participants, thereby avoiding high-risk, ‘big bang’ migration projects.

Unexpected innovation

While traditionally, there has been a ‘fear factor’ around the full replacement of legacy technology, now there is a viable alternative approach. The inverse image of considering all the things that can go wrong, is, of course, discovering all the things that can go right; in other words, change can actually lead to unexpected, beneficial innovation. Exchanges building products on modern underlying infrastructure – those willing to embrace true change – have the potential to fully capitalise on unforeseen innovations.

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The elections for the European Parliament, held between 6th and 9th of June, could end up significantly impacting capital markets on the continent. This juncture could have the effect of reshaping regulatory landscapes, influencing market stability and altering cross-border economic activities.

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